Bitcoin-backed Loans vs Traditional  Loans: A guide to everything you need to know

Are you considering taking out a loan? If you own BTC, you’re in the position to choose between a Bitcoin-backed loan and a traditional loan. But which is better for you? Understanding the differences can help you make the right decision for your financial needs. This guide will break down the key aspects of both options so you can make an informed choice.

What (exactly) are Bitcoin-Backed Loans?

Bitcoin-backed loans are loans secured by using BTC as collateral. Borrowers deposit their digital assets with a lender to receive a loan in fiat currency or another cryptocurrency. The loan amount is typically a percentage of the collateral's value, known as the loan-to-value (LTV) ratio.

Read more: 15 Best Crypto Loan Platforms In 2025

What are Traditional Loans?

Traditional loans are financial products offered by banks, credit unions, and other financial institutions. They can be secured (i.e. backed by collateral like a house or car) or unsecured (based on the borrower's creditworthiness). The borrower repays the loan in installments over a set period, with interest. You can access a loan by collateralizing something, such as money or other worthwhile assets, or you may be able to access one without handing anything over at all (making it uncollateralized). 

Traditional loans are typically influenced by your credit score – a numerical figure designed to represent your financial trustworthiness. A higher score will often unlock lower collateral limits and more favourable APRs.

The Key Differences Between Bitcoin-Backed Loans and Traditional Loans

Collateral Requirements

Bitcoin-backed Loans: Require BTC as collateral. The LTV ratio determines the loan amount. 

Traditional Loans: May require collateral like real estate or vehicles if they’re secured. Alternatively, unsecured loans typically rely on creditworthiness. 

Interest Rates

Bitcoin-backed Loans: May offer lower interest rates due to the high value and liquidity of the collateral.

Traditional Loans: Interest rates vary based on the type of loan, collateral, and borrower’s credit score. Secured loans typically have lower rates than unsecured loans.

Market Conditions

Bitcoin-backed Loans: If market conditions change, meaning your BTC is worth more or less than initially, you can transact with the lender instantly, rebalancing the situation. This is due to the blockchain functioning round the clock.

‍

Traditional Loans: If your loan is backed by a precious metal or other assets that could fluctuate, you cannot resolve issues with the same level of speed as BTC.

‍

Geographical status:

Bitcoin-backed Loans: BTC is generally treated as the same value across the world, even in countries where it’s legally restricted. This is because it can always be transacted with, regardless of legality as there’s no way to turn off its blockchain. This facilitates  greater price consistency for Bitcoin globally.

‍

Traditional Loans: If you’re collateralizing your traditional loan with gold or other commodities, you might face issues depending on your country of residence. Some nations have sanctions on certain assets, which can mean they get devalued by financial institutions, leaving you with a poorer rate.

‍

Credit Checks

Bitcoin-backed Loans: Generally do not require credit checks, making them accessible to a broader audience. However, all borrowers must typically pass standard KYC/AML screening. Crypto-based financial services tend to avoid credit checks altogether, and opt for overcollateralized loans as a safety precaution instead.

Traditional Loans: Require credit checks to assess the borrower’s creditworthiness, affecting approval chances and interest rates. This is the norm, although there’s some outlier cases where creditworthiness is negligible (such as with Government-issued student loans).

Approval Process and Time

Bitcoin-backed Loans: The approval process is fast, often completed within hours.

Traditional Loans: Can take several days or weeks due to extensive paperwork and credit checks. These slower times are a hallmark feature of traditional finance.

Accessibility and Inclusivity

Bitcoin-backed Loans: Accessible virtually globally, provided the borrower has the required BTC. Plus, a lack of credit checks means people who are underbanked can obtain these loans, as the credit-system tends to be a limiting factor for many people who struggle with being recognized by traditional financial institutions.

Traditional Loans: Accessibility depends on the borrower’s jurisdiction of residence, creditworthiness, and the lender’s requirements.

Read more: How to Borrow Against Crypto - Decoding Crypto Loans 

Pros and Cons of Bitcoin-Backed Loans and Traditional Loans

Let’s take a look at the advantages and disadvantages of these two options.

Bitcoin-Backed Loans: Pros

✅ Speed and Efficiency: Bitcoin-backed loans offer fast approval and disbursement times, often within hours, due to automated processes.

✅ Lower Interest Rates: Bitcoin-backed loans often have competitive interest rates due to high-value collateral.

✅ Global Accessibility: Anyone with internet access and BTC can apply, making them widely accessible, however, some regions have jurisdictional restrictions. Plus, a lack of credit checks means underbanked individuals can also seek them out.

‍

Bitcoin-Backed Loans: Cons

❌ Volatility of Collateral: The value of your Bitcoin collateral can fluctuate. Significant decreases in collateral value may lead to liquidation to cover the outstanding loan amount..

❌ Regulatory Uncertainty: Bitcoin-backed loans are subject to changing regulations, which can impact their availability and terms.

❌ Security Concerns: Storing and managing Bitcoin involves security risks, including hacks and theft. When you use a custodial service, such as a crypto lending provider, the onus is on them to look after it. But once it returns to you, you’ll have to put the right measures in place to ensure safety.

‍

Traditional Loans: Pros

✅ Regulated: The traditional lending sector is age-old, with many long-standing regulations in place to protect users. This is the case worldwide.

✅ Wide Range of Options: Various loan types are available to meet different needs, from personal loans to mortgages.

✅ Predictability and Stability: Traditional loans offer predictable repayment schedules and fixed interest rates, aiding in financial planning.

‍

Traditional Loans: Cons

❌ Stringent Approval Criteria: Traditional loans often require a good credit score and thorough credit checks, limiting accessibility.

❌ Higher Interest Rates for Unsecured Loans: Unsecured loans typically have higher interest rates due to the increased risk to lenders.

‍

❌ Longer Processing Times: The approval process can be lengthy, involving significant paperwork and time.

❌ Geographic restrictions: Traditional loans are harder to access in some regions, compared to others.

‍

‍

Use Cases: When to Choose One Over the Other

Traditional loans and Bitcoin-Backed loans both serve a purpose in the financial world, and so there are some situations where one will suit you over the other. Let’s take a look at two common use-cases, one covering each option.

‍

Bitcoin-Backed Loans: Seeking Fiat Without Losing Your Position

One reason people turn to Bitcoin-backed loans is because they are in need of fiat, but feel uncomfortable leaving their BTC position. Many people believe in Bitcoin’s future, and so they’d rather avoid selling so they can still enjoy the benefits. Bitcoin-backed loans allow them to do this by collateralizing their digital assets in return for fiat, which can help with paying bills or other immediate purchases in the short-term.

‍

Traditional Loans: High-Worth Collateral

Traditional loans work well for people who have a high-worth of assets that are not crypto-based. This includes cars, fine art, precious metals, real estate, etc. They’re great for collateralizing, especially if the owner knows they can pay the loan back in the future. The option becomes especially enticing if they have a favorable credit history, as it could allow for better loan-terms.

‍

Why Should You Use Ledn For Your Bitcoin-Backed Loan?

If you have decided that a Bitcoin-backed loan is right for you, Ledn strives to offer secure, transparent, and user-friendly loans with competitive interest rates. They provide flexible loan terms, no monthly interest payments or penalties for early repayment, and robust security measures, including AES-256 encryption and mandatory 2FA.

Flexible Loan Terms

Ledn offers flexible repayment options, allowing you to repay the principal with interest at your convenience. There’s no pressure from monthly interest payments or penalties for early repayment, giving you the freedom to manage your finances on your terms.

‍

Loan Options

Ledn offers a variety of loan options to meet different needs:

‍

Custodied Loans: Collateral is held with Ledn or an institutional USD funding partner and is not lent out to generate interest, reducing credit risk. This option offers increased security.

Read more about Ledn Custodied Loans and Bitcoin-backed Loans and Custody Models.

B2x Loans: This innovative loan option combines a Bitcoin-backed loan with the purchase of an equivalent amount of Bitcoin. Upon repayment, borrowers receive both their original collateral and the additional Bitcoin, making it an innovative solution to finance your BTC purchases. B2X loans involve higher risk and may lead to collateral liquidation if BTC price substantially declines.

‍

Transparency and Client-First Philosophy

Ledn prioritizes transparency by ensuring clients are well-informed about their financial dealings through monthly Open Book Reports. The platform also publishes Proof of Reserves and has never paused client withdrawals. Additionally, Ledn is transparent about fees, making financial planning straightforward and predictable.

‍

Security and Trust

Ledn is backed by renowned investors such as White Star, 10T Holdings, Kingsway, and Coinbase, ensuring a robust and trustworthy platform. It has also been awarded SOC 2 Type 2 certification, meaning it’s recognised for striving to offer secure, accessible, confidential, and offers tight privacy measures. 

‍

FAQs

Are Bitcoin-backed loans safe?

The risks pertaining to Bitcoin-backed loans can be mitigated if conducted through reputable platforms with robust security measures and appropriate risk management. However, borrowers should understand the risks, including price volatility and regulatory uncertainties.

What happens if the value of my BTC collateral drops?

If the value of your Bitcoin collateral drops significantly, you may face a margin call requiring you to repay, deposit more collateral, or risk liquidation of your BTC collateral.

Can I get a Bitcoin-backed loan without collateral?

Most crypto loans require collateral. Unsecured crypto loans are rare and typically involve higher interest rates and stricter terms. 

Read more: Crypto Loans Without Collateral - The Complete Guide

Can I use a Bitcoin-backed loan for a mortgage?

Using a Bitcoin-backed loan for a mortgage is possible, but it depends on the lender's policies and the legal framework in your jurisdiction. Take a look at our discussion on the topic here.

Can I use a Bitcoin loan to buy more Bitcoin?

Yes, you can use the funds from a Bitcoin-backed loan for any purpose, including purchasing more cryptocurrency. In fact, Ledn makes this especially easy via its B2X Loans, where you can purchase an equal amount of Bitcoin to the worth of what you borrow.

Conclusion

Choosing between Bitcoin-backed loans and traditional loans depends on your financial situation, needs, and risk tolerance. Bitcoin-backed loans may offer speed, lower interest rates, and accessibility, while traditional loans provide stability and predictability. Evaluate your options carefully to make the best decision for your borrowing needs.

For more information, or to apply for a crypto loan, visit Ledn.

‍

Disclaimer

This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.

‍